Takeaways From the Mega-Rally

The Monday melt-up showed which stocks will gain in future rallies.

Investors picked up some important clues in Monday's surge. Stocks that rose even higher than the broader averages are the ones that investors will flock to in any future rallies, especially if we get a bout of profit-taking as many expect.

If this rally holds, you can expect to see a surge of companies file for IPOs, many of which have been stalling for time with smaller, interim capital raises. But it remains unclear if the market will have an immediate appetite for these deals.

Traditional mutual funds already have plenty of bargains to select from among the tried-and-true lot of public companies, and hedge funds, which were recently the most active buyers of new issues, have a lot less cash to play with right now.

But any IPO activity would be great news for the investment banks, which are still employing lots of bankers with little revenue to show for their overhead. Any stocks that do not get into the IPO gate can take solace in the fact that public companies might look to use their pumped-up equity to embark on some good old-fashioned M&A activity.

That logic also extends to public-for-public deals, especially in the cases where potential buyers have seen bigger price moves than potential sellers. That logic may be more appealing in stock-for-stock; for example, rumors are floating around Network Appliances ( NTAP). Cash-for-stock deals, such as Barry Diller's rumored interest in Expedia ( EXPE) are unaltered by Monday's big rally.

A firming market could also come to the rescue of debt-laden firms that are feeling the heat from looming covenants. Raising fresh equity would be a badly-needed panacea, but again it is unclear what demand exists for a heavy slate of secondaries. Whether it's an IPO or a secondary, deals may need to be aggressively priced to find buyers.